Hungarian Finance Minister Mihaly Varga said the government could increase tax levies on banks, curb interest on subsidised loans, and put defence investments on ice to curb the country's soaring budget deficit.
Analysts agree that meeting the deficit target without austerity measures seems mission impossible for Viktor Orban's government, facing its biggest crisis since taking power in 2010.
Shares of OTP, Hungary’s largest lender, plunged 6% on the news on the bank levy, and the forint edged 1% lower against the euro.
At a conference, central bank Governor Gyorgy Matolcsy clashed with Varga over who bears responsibility for the EU’s highest inflation, saying that the government’s botched economic policies, including price caps, lifted headline inflation by 3-4pp, and that has dampened economic growth.
Varga, in a keynote speech at the traditional two-day autumn conference of economists, had said the rise in energy prices, the drought as well and loose fiscal and monetary policies contributed to the EU’s highest inflation in Hungary over the course of the last 12 months.
Whilst he acknowledged that inflation was partially fuelled by pre-election spending, a rare example of self-reflection by a Fidesz official, he said the primary responsibility lies with the MNB. The central bank carried on with the purchase of government and corporate bonds simultaneously to tightening lending conditions, sending mixed signals to the market, he said
He also blamed the MNB for prematurely ending its interest rate hike cycle at 13% in September 2022. A month later the central bank was forced to increase rates by a record 5pp to 18%, introducing a new monetary instrument to curb the sell-off of the forint which hit record lows.
Matolcy, speaking after Varga, defended the central bank’s decision and said that Hungary was on the brink of a currency crisis in October. He compared the last few years of the government’s measures to tackle inflation to a "mass disaster". While the MNB stepped on the brakes, the government’s procyclical policy worked against monetary tightening, leading to overspending and higher inflation. Hungary’s annual inflation peaked 10pp above its regional peers, close to 26% in early 2023, according to Matoclsy. The economy would have avoided a recession if inflation aligned with its regional peers.
In his speech, Varga flagged possible fiscal measures when the government reviews the budget, currently under way. According to the financial website Portfilo.hu the planned tax changes will be presented next month, October, including details of the global minimum tax.
Varga pledged that the budget deficit will not exceed last year’s 6.1% level, which analysts have interpreted as a sign that the government will abandon its deficit target.
Analysts unanimously agree that without fiscal correction, the budget deficit will overshoot the 3.9% target by at least 2pp. The budget gap in the first eight months widened to 97% of the full-year target.
Varga hinted at the possibility of revising or cutting interest on new subsidised loans, putting defence spending on hold and more importantly he flagged increasing financial burdens on banks if the sector’s profit exceeds the record HUF1 trillion projected in 2023.
This has come a few months after the government vowed to halve the windfall tax for banks in 2024, contingent upon banks increasing their holding in government bonds.
The banking sector looks an obvious target, when it comes to finding additional revenue sources for the government, Portfolio.hu commented. In the first half, Hungarian banks, excluding foreign subsidiaries, booked an impressive HUF676bn in net earnings, due to the release of provisions and money parked at the MNB for high rates. But industry players claim that the favourable environment will be temporary, as the MNB is set to continue rates as disinflation gathers pace and the economy is facing the longest recession since 1995.
Hungarian banks are already sharing the financial burden with extra levies announced in 2022. So far this year, lenders have paid HUF77bn in bank tax, HUF226bn in windfall tax, and the interest rate caps on corporate and retail loans set them back HUF56.1bn.
Any increase in taxes would unquestionably hinder the expansion of credit supply by banks, precisely at a time when economic policy is eager to witness a swift resurgence in the credit market.
Shortly after Varga’s speech, the Fidesz faction issued a statement saying the government would not change interest-subsidised loans and would not raise bank taxes either. Faction leader Mate Kocsis, speaking at the break of a caucus meeting of the party said the comments reflect the private opinion of the finance minister, The rare rebuttal clearly marks a rift inside the ruling party on how to communicate impending and painful austerity measures, which look inevitable.
Financial analyst and prominent asset fund manager Viktor Zsidai said it is not a surprise that the government is targeting banks, reaping the benefit of high interest rates. In retrospect, it was naïve to believe that bank levies could be reduced, he added.
The Hungarian economy is facing the classic trap of countries pursuing procyclical fiscal policy, which is stimulating their economies in good times but lacking resources when a recession hits. This is compounded by high inflation, which is also hurting the country’s recovery.
Hungary’s OTP plunged 7% during the day to below HUF13,000 after Varga’s comments. It erased some of its losses in the afternoon when Kocsis refuted the news that the bank levy would be upped. OTP shares plummeted 6.3% to HUF13,135 at the end of trading on the Budapest bourse.
The forint traded at 387.75 to the euro in the evening hours, weakening 1% on the day.